Guessing the Costs of IFRS Conversion

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U.S. executives expect to pay more than their European counterparts did to convert to International Financial Reporting Standards. Depending on company size, they estimate they’ll spend between 0.1% and 0.7% of annual revenue to move from U.S. GAAP to the global rules, an endeavor publicly traded companies in Europe undertook four years ago at an average cost of 0.05% of revenue.

The predictions are in a report to be released tomorrow by consultancy Accenture, which in December surveyed 208 executives at U.S. companies with revenues above $1 billion (more than three-fourths of respondents have finance-related titles and work at companies with more than $5 billion in revenue). Not only do they expect to pay more than the Europeans did, but many believe they will be on the hook for substantially more than the 0.125% to 0.13% of revenue that the Securities and Exchange Commission has pegged as the average for U.S. companies.

In its proposed plan to move all U.S. publicly traded companies to the global standards, the SEC also predicted that the largest U.S. registrants that adopt IFRS early would incur about $32 million in additional costs for their first IFRS-prepared annual reports.

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The most widely used metric for the expenses incurred in Europe came from the Institute of Chartered Accountants in England and Wales back in 2005, after European Union companies switched from their home-country GAAPs to IFRS. Those with revenue between 500 million Euros and 5 billion Euros spent 0.05 percent of their revenue in their first year of transitioning to IFRS.

Accenture — which has helped European and Canadian companies with their IFRS conversions and stands to gain if the SEC moves forward with the IFRS roadmap — believes the change could be harder on American businesses for several reasons. For one, U.S. companies will have to run GAAP and IFRS simultaneously under the SEC’s plan and in order to meet statutory and regulatory requirements outside the SEC’s purview, such as for filings made with the IRS. In addition, the European experience is viewed to have been a bit easier because the countries’ accounting rules were fairly similar to the principles-based IFRS, whereas GAAP is considered more rules-based, or prescriptive.

Smaller Business, Bigger Hit

Smaller companies likely will have a disproportionately higher cost to begin the conversion process, if regulators mandate that they, as well as their larger counterparts, move to IFRS. Companies with revenue between $1 billion and $4.9 billion — the lowest category in the Accenture survey — predict they would spend 0.731 percent of their revenue on the change. Compare that to the companies with revenue over $50 billion that expect to spend only 0.103% of their revenue.

Executives’ views of the cost and time it will take to convert accounting languages are important for how the IFRS movement in the United States plays out. Right now it’s in flux, as the SEC recently changed leadership, and new chairman Mary Schapiro has expressed doubts about the pace her predecessor was pushing for widespread adoption of IFRS. The SEC is collecting feedback through April 20 on its proposed roadmap, under which all publicly traded U.S. companies would be using the global rules by 2016.

CFOs with all but the shortest memories will remember that not too long ago the SEC made an estimate for a mandated enterprise-wide project that ended up costing companies millions of dollars in auditing fees. That project — the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000.

In the Accenture study, 36% of the respondents said the total cost and complexity of converting to IFRS is their main obstacle to making the change even though nearly 80% have plans to adopt the global standards within two years. Anecdotally, others have expressed similar concerns to the SEC through comment letters. For example, James Barlow, corporate controller for Allergan, told the SEC that the health-care company would likely spend at least four times what it did on Sarbanes-Oxley compliance.

He said audit firms have told him they estimate that a GAAP-to-IFRS switch will cost between 0.5 percent and 1 percent of a company’s annual revenue in addition to two to three years of hard work.

Publicly, accounting firms and service providers are not giving out such specific numbers, preferring to rely on the Europeans’ experience for guidance and warning that every company’s facts and circumstances will differ. And although Accenture shares average cost predictions made by respondents to its survey, Troy Barton, senior executive for the firm’s finance and performance management business, cautions that the ranges the surveyed executives provide should be used only as a starting point for gauging how much conversion will actually cost. “It is important for executives to avoid relying on simple averages when budgeting for the conversion and instead consider their specific circumstances,” the report advises.

Costs will depend on a company’s industry, size, complexity, staffing abilities, and accounting policies, says Accenture. In particular, the firm found that cost predictions vary within size groups; among companies with $50 billion or more in revenue, 43 percent said they’ll probably spend less than $25 million, but 30 percent believe they’ll spend more than $100 million.

Accenture didn’t ask the respondents how they came up with their estimates. However, Barton says companies should expect, on average, that half of the work involved will require external sources. He added that 40% to 50% of IFRS work involves technology; 30% to 40% processes; and about 20% is technical accounting work, related to working through the differences between the two standards.